The $99 Kindle

Why e-readers will soon cost less than $100.

Late last month, Amazon unveiled a new version of its Kindle e-book reader that, like every new Kindle, is thinner, lighter, and smaller than the previous one. It’s also the cheapest Kindle ever—the new Wi-Fi version sells for just $139. A year ago, Amazon was selling the 3G Kindle—a version that allows you to download a book even when you’re not connected to a Wi-Fi network—for $299. This June, Amazon lowered the price of that version from $259 to $189, a few hours after Barnes & Noble announced that it was lowering the price of its 3G e-reader, the Nook, from $259 to $199. The new Wi-Fi Kindle is a direct response to the pricing of Barnes & Noble’s Wi-Fi version, which sells for $149. You can think of Amazon CEO Jeff Bezos as the Crazy Eddie of the e-book business: Every time a rival gets close to the Kindle’s prices, Bezos goes even lower. He will not be undersold!

Obviously, this is good news for anyone looking to buy an e-reader. And people certainly are clamoring for the Kindle—Amazon says that sales tripled after it lowered the price to $189, and the company now lists both the 3G and Wi-Fi versions as being “temporarily oversold.” (If you order a Kindle today, it will ship in early September.)

But crashing prices can also create uncertainty for customers. If prices are falling so fast, would it be foolish to buy an e-reader now? Does it make more sense to wait a few months for Crazy Jeffy to go even lower?

I think so. I rarely make predictions about the tech business, but here goes: Before the holidays, Amazon will cut the price of the Wi-Fi Kindle to $99, and the 3G version will go for $150 or less. Amazon will do so, I think, not only to sell a lot of Kindles but also to cement its online store as the iTunes for books—the dominant force in the publishing business for the foreseeable future. A $99 price tag will make the Kindle the hottest gift of the season—much cheaper than the $499 iPad, more useful than an Xbox Kinect, and a lot more fun than a cable-knit sweater.

Why am I so confident that the Amazon will slide under the $100 threshold? For one thing, because it probably can. Last year, the research firm iSuppli estimated that it cost Amazon $185 to produce a 3G Kindle, an estimate that covered the price of the materials and manufacturing, but didn’t include the large costs associated with providing 3G service, customer support, marketing, and developing the device. After tearing open the Kindle, iSuppli reported that the two most expensive components are its E Ink display module (which costs Amazon about $60) and the 3G chip ($30).

Why can the Wi-Fi version sell for so much less? For one thing, it doesn’t have the 3G chip, nor will Amazon have to pay for 3G coverage for the device. What’s more, the price of producing an E Ink display module has fallen sharply since iSuppli’s report. In March, Freescale Semiconductor, the company that makes microprocessors for most of the popular e-readers on the market today (including the Kindle), introduced a new chip that combines a processor and several other e-reader components—including a display controller—on a single piece of hardware. E-reader manufacturers will be able to buy the chip for under $10. At the time, Freescale predicted that its new chip would push manufacturers to release readers priced for less than $100.

Amazon’s competition is already moving in that direction. Shortly after Bezos unveiled the new Kindle, a company called Copia—one of several small manufacturers trying to break into the e-reader market—became the first to break the $100 barrier. Its Ocean Reader will go for $99 when it comes out in the fall.

All of these trends likely guarantee that Amazon will release a $99 e-reader someday. But why do I think it will do so before the end of the year? If the company is already selling out of its inventory at its current prices, what’s the point of making the Kindle even cheaper? The quick answer is that tech companies usually ramp up production and lower their prices for the holidays. Last October, Amazon cut the price of the Kindle from $299 to $259. The day after Christmas, it reported that the Kindle was the “most-gifted” item in the company’s history. Even so, the Kindle never ran out of stock in December (as it had in 2008). If it lowers the price this October, you can be sure Amazon will make enough to satisfy the demand.

And at $99, demand will be unbelievable. Last year a Forrester Research survey found that fewer than 20 percent of “U.S. adults online” would consider buying a reader priced at more than $100. When asked about a reader priced under $100, however, nearly 65 percent said they would consider one, and almost 40 percent said they’d buy it within six months. In other words, $99 is a magic price—the threshold where a huge number of customers who are on the fence about e-readers decide to jump in.

This suggests that even if Amazon has to take a small loss on each device in order to get under $100, it might consider the sacrifice worth it. For much of the last year, Amazon has been fighting a war with publishers over the future of the book industry. When it released the Kindle in 2007, most books in the Kindle Store sold for $9.99—lower than the price Amazon paid publishers for the titles. The company’s aim with that pricing scheme was to set consumer expectations for the price of e-books. Amazon reasoned that if customers came to expect all digital books to sell for $10, publishers would eventually be forced to lower their prices.

Things didn’t turn out as Amazon planned. When Apple released the iPad—along with its own digital books, called iBooks—many publishers made deals with Apple under a system the book industry calls the “agency model.” This plan let publishers set their own prices for e-books, even if they’re more than $9.99; the publisher takes 70 percent of the retail price, with Apple getting 30 percent. In February, after an ugly battle with the publisher Macmillan that resulted in Amazon temporarily removing all of that company’s titles from the Kindle Store, Amazon relented and began allowing publishers to sell books in the Kindle store under the agency model. If you peruse the list of Kindle bestsellers today, you’ll see several titles priced at more than $10.

Despite losing this battle with publishers, though, Amazon hasn’t lost a lot of ground in the e-book business. Ian Freed, the company’s vice president in charge of the Kindle, recently told Cnet that it controls 70 percent to 80 percent of the e-book market. He also said that just 80 percent of its e-books are sold to Kindle owners—in other words, 20 percent of the people who buy Kindle books are doing so from Kindle apps on devices like the iPad, iPhone, Android phones, BlackBerrys, and Macs and PCs.

This leads to what could be Amazon’s main reason for pricing the Kindle at $99—it could be the company’s best defense against the iPad and the many other tablet computers that may soon dominate the personal computing industry. The millions of people who buy $99 Kindles will also need to buy millions of Kindle books, and it’s those books that will push them to stick with Amazon’s store over the long run. When those same people later buy phones, tablets, or other devices, they’ll then have a reason to shun, say, the iBook Store and keep buying their books from the Kindle Store.

That’s the difference between Jeff Bezos and Crazy Eddie, who would always close out his ads by claiming that “Our prices are insane!” For Amazon, a $99 e-reader is perhaps the only sane choice.